UPDATE 3-S.Korea says economy hurting, unveils more measures

(Adds Bank of Korea Governor in paragraph 15)

By Park Jung-youn and Seo Eun-kyung

SEOUL Oct 23 (Reuters) - South Korea warned on Thursday that Asia's fourth-biggest economy was already showing significant weakness as authorities added to a raft of measures to protect it from a severe global downturn.

President Lee Myung-bak was set to leave for Beijing for an Asian-Europe summit, looking to meet with the leaders of Japan and China to shore up the regional economy and proposing a new international body to steer through the global crisis.

After pledging to provide $130 billion to dollar-starved banks and another $4 billion to debt-laden builders, the central bank increased the ceiling on cheap loans to smaller companies.

Still, investors nerves have not been soothed by the raft of measures this week. The main stock market hit a 40-month low on Thursday and trading was halted on its junior market partner Kosdaq, which dropped to record low.

The won slumped to its lowest domestic close since the Asian financial crisis a decade ago.

Under pressure to take more action, authorities next move could be another cut in interest rates, analysts said.

"Lower interest rates could accelerate the won's slide but the central bank must prevent a hard-landing of the economy," said Moon Byung-sik, a Daishin Securities fixed-income analyst, who sees a possible 50 basis point cut in November, when the central bank is next scheduled to meet.

The view was given some credence by the governor of the central bank who said the economy was under pressure and that would be a factor in deciding monetary policy.

"Of course there are some price-push pressures from the (weakening) won, but the domestic economy has considerably weakened in the third quarter," Lee Seong-tae told a parliamentary committee.

Third-quarter gross domestic product, due to be published on Friday, is expected to show that the economy grew at its slowest pace in four years in the third quarter. [ID:nSEO330864]

"We expect the domestic economy to be considerably weak this year and through the first half of next year," he said.

Earlier this month, the Bank of Korea cut its benchmark interest rate by 25 basis points to 5.00 percent, the first reduction since late 2004. The cut was announced a day after major world banks joined forces in cutting their rates to try to restore confidence to financial markets.

Governor Lee was later quoted by a local online news provider as telling lawmakers that the economy would most likely grow less than 4 percent next year, compared with 5 percent last year and 4.6 percent projected for this year.

In raising the ceiling on cheap loans for smaller companies, the central bank is targetting the sector that provides most jobs in the economy.

It raised the ceiling to 9 trillion won ($6.61 billion) from 6.5 trillion won, a bigger-than-expected increase and the first rise in seven years.

Individual commercial banks can lend customers a multiple of the money provided by the central bank at below-market interest rates by adding their own funds, significantly increasing the impact of the move.

Lending under this facility carries an annual interest rate of 3.25 percent, well below the yield on the country's main corporate bonds of about 8 percent.

In other moves aimed at steadying a wobbly economy, the Bank of Korea also said it could inject extra won liquidity into the financial system by buying bonds issued to local commercial banks. [ID:nSEO21264]

A South Korean financial regulator said it could provide liquidity to cash-short domestic brokers and asset managers in cooperation with the central bank. [ID:nSEO4531]

MARKETS

The won KRW=, down about 17 percent over the past month, at one stage on Thursday fell as much as 5 percent. An analyst said a rate cut would not necessarily push the battered currency down much more because it had fallen significantly already.

It ended the local session down 3.3 percent. [ID:nSEO322749]

The main share index .KS11 fell about 7.5 percent to its lowest close since mid-July 2005, led by technology and heavy industry shares. [ID:nSEO8925]

President Lee has warned the global crisis threatened to be more severe than the Asian financial meltdown a decade ago that almost derailed the South Korean economy. At that time, the country was bailed out of its troubles by a rescue package led by the IMF worth close to $60 billion.

Lee last week called for a new international body to manage cross-border economic problems, without saying if it would complement or replace the International Monetary Fund.

Lee has also suggested finance ministers from South Korea, China and Japan speed up the planned creation of an $80 billion pool in currency swaps desinged to cushion the impact of the financial turmoil on their economies.

On Wednesday, the heads of the country's major banks pledged to cut their own costs, including by taking pay cuts, in return for the government's rescue package.

In a sign that the latest government measures to help banks were beginning to bear fruit, state-run Export-Import Bank of Korea (KEXIM) said it had raised $150 million through a 1-year Brazilian real bond issue and a 5-year note from Asia. (Additional reporting by Rhee So-eui, Yoo Choonsik and Soojung Lee, Writing by Jonathan Thatcher and Jon Herskovitz; Editing by Neil Fullick)